Monday, November 24, 2008

$280,000 per job

Facing an increasingly ominous economic outlook, President-elect Barack Obama and other Democrats are rapidly ratcheting up plans for a massive fiscal stimulus program that could total as much as $700 billion over the next two years....Obama has set a goal of creating or preserving 2.5 million jobs by 2011.

Dividing one number by the other, that works out to $280,000 per job.

What is going on here? Logically, it must be one of three possibilities:

1. The fiscal stimulus is going to be much smaller than is being reported.2. The new administration is setting a low bar for itself when it comes to job creation.3. The Obama team believes in very small fiscal policy multipliers.

Let me amplify the last point with a rough back-of-the-envelope calculation. The average weekly earnings of production and nonsupervisory workers is about $600, or about $60,000 over a two-year period. Granted, labor income is only about two-thirds of national income, and we have to add a few supervisors into the mix. So let's say each job created means $100,000 of extra national income. If we are generating $100,000 of income with $280,000 of government spending, the multiplier is only 100/280, or 0.36. By contrast, traditional Keynesian models suggest a multiplier closer to 2.0.

----

Update: Readers have sent me several suggestions for how to reconcile the multiplier numbers. First, annual GDP per worker is larger than the $50,000 figure implicit in the above calculation. Second, because of labor hoarding in downturns, the percentage change in GDP could be larger than the percentage change in employment. Third, part of Obama stimulus may take the form of tax cuts rather than spending hikes; the traditional Keynesian multiplier for a tax cut is about 1.2 rather than 2.0. Finally, as I noted in my original post, the Obama plan could well be less than $700 billion. All good points.

About Me

I am the Robert M. Beren Professor of Economics at Harvard University, where I teach introductory economics (ec 10). I use this blog to keep in touch with my current and former students. Teachers and students at other schools, as well as others interested in economic issues, are welcome to use this resource.